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Moody's downgrades Bank Leumi's ratings; maintains negative outlook

12 Mar 2009

Limassol, March 12, 2009 -- Moody's Investors Service has today downgraded the long-term
local currency deposit rating of Bank Leumi to A1 from Aa3. At
the same time, the Baseline Credit Assessment (BCA) was lowered
to Baa1 from A3 and the bank financial strength rating (BFSR) was downgraded
to C- from C. The bank's A1 long-term foreign
currency deposit rating and Prime-1 short-term deposit ratings
were affirmed. The outlook on both the long-term local and
foreign currency deposit ratings and on the BCA is negative, while
the outlook on BFSR is stable.

"The rating actions reflect Moody's expectations of a worsening
in Leumi's financial fundamentals resulting from: (a) accelerated
deteriorating economic and operating conditions in Israel, which
is expected to lead to higher default rates among borrowers, (b)
the ongoing financial crisis which continues to weigh negatively on capital
markets, suggesting further impairments of financial assets held,
(c) reduced profitability due to elevated credit costs, the realisation
of financial asset impairments, a lower interest rate environment
and perhaps a weaker business expansion, and (d) exposure to sectors
that Moody's expects to face severe financial stress during this
economic downturn, such as construction and tourism,"
says Christos Theofilou, a Limassol-based Moody's Associate
Analyst.

A relatively low earning power is expected to curtail Leumi's ability
to absorb elevated provisioning expenses at a time when credit costs are
increasing due to weaker credit quality trends. Moody's internal
stress tests show that this, coupled with the realisation of mark-to-market
losses on its financial assets, suggest that bottom-line
profitability and capitalisation will remain under pressure in the coming
quarters. Moody's also notes that Leumi has recently issued
a profit warning relating to the fourth quarter of 2008. Accordingly,
the bank expects to post a loss in the region of NIS700-800 million
for the fourth quarter of 2008, lowering its full-year profitability
to an estimate between NIS475 million and NIS575 million.

Furthermore, Moody's expects asset quality metrics to worsen
in the coming quarters as deteriorating economic conditions in Israel
take their toll on credit quality. The Israeli economy contracted
by 0.5% in the last quarter of 2008 and forecasts for 2009
point to a further economic contraction, with a number of economic
sectors, and hence corporations, facing significant stress.
Furthermore, the prospect of higher unemployment rates could also
lead to a rise in default rates in retail lending, necessitating
elevated provisioning expenses. In tandem, relatively high
single borrower concentrations are a challenge for most Israeli banks,
resulting in potentially rapid asset quality deterioration during an economic
downturn.

Moody's would also like to stress that in current market conditions,
liquidity and retail funding are considered key strengths of the Israeli
banking system and of Leumi in particular. Leumi benefits from
a large, stable customer deposit base, which comfortably funds
its loan portfolios. Leumi's customer loans-to-deposits
ratio stood at 91.7% as at end-Q3 2008. Liquidity
management is also considered adequate. All Israeli banks are net
providers of credit abroad, therefore the ongoing financial crisis
has negatively affected the value of their investments and has not resulted
in a liquidity squeeze, thus far. Furthermore, Leumi
has a dominant and stable franchise positioning within Israel that provides
a certain degree of stability.

The outlook on Leumi's long-term deposit and debt ratings
and BCA remain negative, reflecting Moody's concerns regarding
(a) the longevity and severity of the economic crisis in Israel;
and (b) the potential impact of such economic downturn on the bank's
financial fundamentals, which could be greater than currently assumed
by its ratings.

Moody's previous rating action on Bank Leumi was on 16 December
2008, when it changed the outlook on the BFSRs and long-term
local currency deposit ratings of four Israeli Banks -- including
Bank Leumi -- to negative from stable, prompted by the rating
agency's growing concerns over the banks' intrinsic financial
strength.

The principal methodologies used in rating Bank Leumi are "Bank
Financial Strength Ratings: Global Methodology" and "Incorporation
of Joint-Default Analysis into Moody's Bank Ratings:
A Refined Methodology", which can be found on www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found in the Credit Policy & Methodologies directory.

Headquartered in Tel Aviv, Israel, Bank Leumi had total assets
of NIS293.8 billion (US$85.9 billion) as at end-September
2008.

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